US Economic Outlook. How long will the ride last? IHS ECONOMICS. US Outlook

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1 IHS ECONOMICS US Outlook US Economic Outlook How long will the ride last? December 2014 ihs.com Douglas Handler, IHS Chief US Economist, ,

2 US Outlook / December 2014 US Economic Overview 2

3 Executive Summary - economic growth accelerates a notch from 2.2% in 2014 to 2.7% in Adverse demographics is now an issue Labor force growth Mismatches between available jobs and available people Household formation US Outlook / December 2014 Gasoline price dividend gets partially absorbed by poorer international trade conditions Fiscal policy to remain in benign neglect at least through 2016 election; additional defense spending possible Fed to take action in mid-2015, but the anticipation will be worse than the impact 3

4 Since emerging from the recession, the US economy has downshifted. Will it find that next gear? Real GDP growth US Outlook / December % average % average Where s the growth? Federal budget deficit reduction Consumer retrenchment Higher taxes Debt repayment Poor wage growth Fizzled housing recovery Business investment rebound did not fully offset the downturn

5 Is the labor market getting tight enough to drive wage pressures? Job creation and the unemployment rate US Outlook / December 2014 Number of new jobs (000s) Unemployment rate (%) Source: IHS Employment growth Unemployment rate 5

6 US Outlook / December 2014 Growth in the labor force has downshifted. Employment and labor 160 Before the recession: 1.5 million / year pace After the recession: 0.4 million / year pace 68 Labor force (Millions) Percent of labor force Source: IHS Labor force (Left) Participation rate (Right) 6

7 We re aging, and entering cohorts with lower participation rates. US Outlook / December 2014 Labor force size (millions) % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Participation Rate (2013, % of labor force) Age cohort Particip. % 7

8 Only the services areas are materially adding jobs. Employment before and after the recession (millions) US Outlook / December Goods Services Government Change during recession * Change since end of recession * *=Recession period: December 2007 through June 2009 Source: IHS Losses from recession: 7.4 million Changes since recession end: 9.1 million 8

9 US Outlook / December 2014 Recent job creation is skewed toward lower-income occupations Recent job growth and average weekly earnings Number of jobs (000s) Overall average weekly earnings $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Average weekly earnings # of new jobs over past 12 months (bars, 000s, left axis) Average weekly earnings (squares, right axis) 9

10 US Outlook / December 2014 Here s what the Fed is looking at to identify inflation. Personal consumption price deflators (change versus year-ago) 5% 4% Fed 2% threshold 3% 2% 1% 0% -1% -2% Source: IHS All goods and services Excluding food and energy 10

11 Monetary policy status quo maintained through mid-2015, although long-term rates will rise as expansion gathers steam. Interest rate outlook 6% US Outlook / December % 4% Fed tapering 3% 2% 1% 0% Near zero rates end June 2015 Source: IHS Fed funds rate 10-year treasury 11

12 US Outlook / December 2014 Energy and the Economy 12

13 US Outlook / December 2014 Savings at the pump have added to consumers wallets. Per-household spending on gasoline (annual rates) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $

14 US Outlook / December 2014 Contributions from unconventional energy sources will continue to add to US GDP. US Mining and Petroleum Structures (billions of 2009 dollars) US Imports of Petroleum Products (billions of 2009 dollars)

15 US Outlook / December 2014 An Economist s wishes for

16 Santa wish list for 2015 Just one: Improve productivity! Education, education and education Infrastructure investment Technology investment improve internet speed, cost and security Remove impediments to labor force participation Reduce risk of doing business Increase economic awareness US Outlook / December 2014 Productivity growth (output / hour, year-over-year change) (est.) 16

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18 US Outlook / December 2014 Current account deficit steadies around 2.4% of GDP. US. current account balance ($ billions and percent of GDP) , Source: IHS Current Account Deficit (left axis) Deficit as a % of GDP (right axis) 18

19 US growth will slow in q4, and into 2015, but a gradual acceleration is expected thereafter. Real GDP growth (annualized percent change) US Outlook / December Source: IHS 19

20 Looking forward, we will still be counting on consumer spending to drive the bulk of economic growth. Contributions to real GDP growth US Outlook / December 2014 Annualized percentage change Real GDP Consumer spending Fixed investment Housing Inventories Exports Imports Government Source: IHS 20